Key Takeaways
- University endowments that invest more in hedge funds as a part of their long-term strategy have grown faster than endowments that allocate less to hedge funds.
- An average university with a $5 billion endowment and a 10% allocation to hedge funds earns nearly $240 million more over five years than an endowment with no allocation to hedge funds.
MFA released an analysis of Pensions and Investments (P&I) university endowments data which found that university endowments that invest more in hedge funds as a part of their long-term strategy have grown faster than endowments that allocate less to hedge funds.
University endowment funds are among the most innovative institutional investors, and they play a crucial role in providing access to higher education for students in need.
The MFA study combined P&I investment returns from 2016 to 2021 with separate information on how heavily each endowment invested in hedge funds at the beginning of the period. The results reveal that for each additional percentage point of assets that an endowment invested in hedge funds in 2015, subsequent returns were 0.06% higher per year—an impactful difference over the years. For example, an average university with a $5 billion endowment and a 10% allocation to hedge funds earns nearly $240 million more over five years than an endowment with no allocation to hedge funds.
Many university endowments invest in alternatives—hedge funds, credit funds, and hybrid funds—to achieve consistent and balanced returns over time. In particular, colleges and universities across the U.S. collectively invest more than $130 billion in hedge funds to support students.
While a university endowment portfolio features many types of investments, hedge funds are incorporated to protect assets from market downturns and reduce the volatility of returns since hedge funds often provide returns uncorrelated with market returns.
Ultimately, the test of hedge funds and all other portfolio components is whether portfolios containing them do better or worse. This analysis provides some empirical, numerical evidence of the vital role hedge funds play in improving the returns of endowments.
